Blog: How US buyers can counter the Brexit effect on M&A

Jun 11th 2018 Author:

Joe Stelzer

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Deals across the Atlantic look set to keep the UK’s M&A market busy for a while yet.

Mergers and acquisitions involving UK companies have been clearly affected by Brexit uncertainty. But it can be easy to overestimate the importance of this effect.

In the first quarter of this year, M&A activity involving British companies surged to $275bn, its highest value since the turn of the century.

M&A between UK and EU companies slowed last year, but this was from a record high the previous year. The UK’s referendum vote triggered a substantial increase in spending from buyers overseas into UK companies, partly attributed to the sliding value of the pound, according to figures from the Office of National Statistics.

And it is worth remembering the value of deals between the UK and the rest of Europe more than doubled in the first half of last year, from $14.6bn to more than $32.4bn. Many British businesses are looking to consolidate their position in EU markets ahead of a deal being finalised.

Much depends on the nature of the Brexit deal that is ultimately agreed of course. The administrative burden of preparing for the UK’s departure from the EU – such as the process of navigating passporting rights – is causing some buyers to hold off on M&A until the future is less unclear. For example, the volume of insurance M&A deals in Europe fell 22% last year largely because of the impact of Brexit, according to the law firm Clyde & Co.

But, for the UK, the hesitancy of some European buyers and sellers does not mean the market is closed. It has been a stellar period of late for UK firms making purchases across the Atlantic. There were 109 such deals in the second half of 2017 – a jump of almost a quarter over the previous year. Mega deals amped up the volumes of these acquisitions, including Reckitt Benckiser’s $18bn acquisition of Mead Johnson.

Acquisitions of UK companies by their US counterparts are particularly strong in the tech sector. The UK’s technology sector in particular remains one of the prime targets for American purchasers. Between January 2015 and February 2018, Britain attracted a third of all US tech acquisitions by number and some 38% by value, according to the investment bank GP Bullhound. While Germany and France together received less than $2.5bn, last year incoming US tech investment into the UK almost trebled to $22.8bn.

It should be noted that outside the tech sector, the picture has not been quite as positive. US firms acquired 156 of their British counterparts in the second half of last year – down 14% from the previous year. It is possible some investors are jittery about unpredictable US trade policy stemming from President Trump’s ‘America First’ platform while also keeping an eye on the risks posed by rising interest rates, as the Federal Reserve begins to unwind a decade of easy monetary policy.

Yet there are a few reasons why this is likely to be a temporary pause in an otherwise rising market.

One reason is the large corporate tax cuts pushed through by the US government in December. With corporate rates falling from 35% to 21%, companies are using their extra cash to indulge in a spending spree, and valuations are rising as a result. In the first quarter of this year, five of top 10 largest bids for UK companies have been from US buyers.

The huge amount of dry powder held by the private equity sector – largely in the US – is also a positive for M&A prospects. And with California, New York and London ensconced as global hubs of innovation, there is huge scope for further collaboration as companies in every industry contend with the implications of digitisation.

In fact, M&A between the UK and the US offers such good prospects for growth that there is every reason to feel bullish about the British deal market over the coming year, even with the lingering Brexit uncertainty. British businesses received more investment (£42.8bn) through announced M&A deals than any of their Western European peers last month – the largest monthly value for the country since July 2016. Do not be surprised to see the M&A deal rush to continue for a while longer.


This article first appeared in Financial News.